Stop Loss : Set Low or Set High?

December 5, 2020

After a few days of conducting demo Margin Trading on Bityard, it gives me more ideas and techniques about trading - proper entering and exiting, and setting a stop-loss order. A NOOB in trading truly needs more practice and knowledge before going live trade to prevent from having big losses.

And just yesterday, I saw the tweet of Bityard stating that their SL is up to 90%. At that moment, I realized the real technique of setting stop-loss orders to achieve more profit in trading. So last night before I went to sleep, I've conducted a demo applying 90% SL at an initial margin of $100. I saw that the BCH price was going down, so I chose the short trade (open it at $290.87 and the target price was $285). Here's the result when I checked it this morning. I have gained 40.36% profit from my $100 initial margin.

So what's the catch?

Ever since I started demo trading, I always set my SL at 5% because I thought it will prevent me from getting big losses, but after my latest demo, I've realized that it is actually not the best strategy. Why? You will know the reason in this article.

First, what is Stop Loss?

A simple definition of Stop Loss Order is, it is set to limit a trader's loss on a security position.

For example (a trade with $100 initial margin)

Let's say you purchased BCH at the target price of $280 then you set the stop-loss at 5% (that is a $5 possible loss of your $100 initial margin). If the price goes below $280, your trade will then be successful.
However, if it suddenly goes up to $308 which is 10% from your opening price without your notice, your trade will then be automatically closed losing $5 (5%) of your initial margin since you set the stop-loss at 5%.

So here's the difference between 5% SL and 90% SL.

Take my demo with 90% Stop Loss order as an example: (check the photo above)

I purchased BCH at $285 with the opening price of $290.87 and set the stop-loss at 90%. (Initial Margin was $100 and Initial Leverage was 20x). It reached my target price so I gained 40.36% from my Initial Margin and that is $40.36 profit.

My goal was to hit the price of $285 that is why I set 90% SL. As you can see, there is only a $5.87 difference between my opening price and my target price. So there is a big chance that it will be able to reach my target price as I saw the market was bloody red.

If you are confused how it becomes $40.36?

(Simply because I have set my TP (Take Profit) to 40.36% which $285)

Or you can compute it this way too. Just get the difference of $290.87-$285 which is $5.87 then multiply it with the 6.8759 quantity.

5.87 x 6.8759 = 40.36

Opening price - Closing price x (Quantity) = Profit

Volume ÷ Opening price = Quantity

Initial Margin x Initial Leverage = Volume

(I used a calculator for this Math thingy 😅)

Don't make yourself confused, Bityard trading system will automatically compute it for you. Just enter your target price and stop-loss percentage 🤣.

When you set a higher SL order, you still have a chance to reach your target price. However, if you set your SL at only 5%, you will immediately lose your trade once the price reaches the 5% SL order. And if you set 5% SL and lose repeatedly, it will add over time.

TAKE NOTE:

If your SL is set too high, there is also a high risk of losing your trade once it goes against your prediction. To prevent this from happening, always monitor your trade if you set a high SL.

Do not set a target price that is impossible to reach. And do not be too greedy, if you think you've gain enough, close your trade immediately and just open a new trade if you want to earn more.

The market is so volatile, we don't know when it will go up, and when it will go down. And it won't go along with your prediction all the time unless you're a professional trader already.

But if you do not want to set a Stop Loss order, you can have a Limit order which aims to profit from the current trends. A crypto trader will only set a Stop Loss order to limit their potential losses to no more than they can afford to lose.

Advantage of Stop Loss Order:

The advantage of a stop-loss order is you do not need to monitor your trades from time to time. This is especially handy when you are busy at work, on a vacation, or don't have enough time to closely monitor your trade and the market.

Disadvantage of Stop Loss Order:

The disadvantage is that the target price could be activated by a short-term fluctuation in a crypto’s price. It is not a good strategy to set a 5% SL if the asset has a history of fluctuating 10% or more in a day or a week. You will more likely to lose your trade.

The key is to set a Stop Loss percentage that will go along with the fluctuations of your traded asset while preventing as much downside risk as possible.

Stop-loss can indeed be misleading for new traders especially if they do not understand well how the market behaves.

When choosing a stop-loss order, a new trader should always consider the risk, as well as the significance of the crypto asset to their portfolio. They should also be able to predict the behavior of the market. It is not always a must to use a Stop Loss, it is just a tool based on how you analyze the market. The success of Stop Loss only depends on how your analysis is carried out.

I am not an expert in this matter so I am not advising you to copy this strategy. Always DYOR (do your own research) and if you are a new trader, you can conduct demo trading to know more ideas and strategies. And most importantly, do not ever go live trading without enough knowledge on effective trading strategies.

If you want to try demo margin trading on Bityard, you can sign up using this link https://m.bityard.com/?ru=sypznM. You can also mine for free their native token BYD which can be used in trading and other transaction fee.

Thanks for reading @Jane

Lead image from tradesanta.com